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Recommendation to receive and file the Fiscal Year 2008 Third Quarter Budget Performance Report. (Citywide)
DISCUSSION
This report provides an update on the City's Fiscal Year 2008 (FY 08) budget and operational performance through June 30, 2008. The report covers a broad spectrum of financial information for all funds and departments with multi-year comparisons, charts and graphs to provide a clear picture of the City's financial situation. While the focus of the financial report is the General Fund, exceptional performance (both positive and negative) in other funds is highlighted where applicable.
Summary
The total Adjusted City Budget for all funds as of June 30, 2008 was $3.16 billion. With 75 percent of the year complete, expenditure performance in all funds is at approximately 64.1 percent year-to-date. The total adjusted General Fund expenditure budget was $388.9 million, with budgeted revenue of $387.5 million. The difference between budgeted revenue and expense reflects carry over appropriations. After the third quarter of the fiscal year, based on current appropriation authority, overall expenditures are slightly below target, the result of current year vacancy savings targets issued to General Fund departments. With 75 percent of the fiscal year complete, approximately 79.9 percent of anticipated General Fund revenue has been collected.
FY 08 General Fund Revenue
Current and projected revenue performance is based upon a variety of factors, and includes both structural and one-time revenues. It is important to note the risks inherent in projecting revenue, as the City has limited, if any, authority to affect certain revenue streams. Overall, year-to-date General Fund revenue is $310.9 million, or approximately 79.9 percent of total projected revenue, and is close to the expected performance after the third quarter of the fiscal year. Performance to date numbers for revenue are $16.6 million above FY 07 primarily due to a $9.2 million increase in transfers from other funds, three-fourths of which is related to an increase in the Uplands Oil transfer due to a continued rise in oil prices. Third quarter collections for major revenue sources such as Secured Real Property Tax, Sales and Use Tax, Property Tax In-Lieu of Vehicle License Fees, Pipeline Fees, Pipeline Franchise Payments and Other Department Services to Proprietary Funds account for the remaining year-over-year increase. Year-over-year increases such as these partially offset lower collections in other revenue sources such as Electric Company Franchise Payments, Electric User Tax, CIP Engineering Charges, Real Property Transfer Tax and the Other Revenue category.
The General Fund revenue estimate-to-close is $389.0 million, which is $1.5 million higher than the $387.5 million adjusted budget. Despite anticipated revenue shortfalls in several key areas, increases in other revenue sources, primarily Upland Oil revenue, will more than likely offset other losses this fiscal year.
The table below highlights year-to-date performance for selected General Fund revenues.
See Staff report in Legistar InSite for charts
A summary of the top 40 General Fund revenues is included in Attachment A, and a year-to-year (FY 07 to FY 08) comparison of the top 15 General Fund revenues is included in Attachment B. Please also see Attachment C for a breakdown of General Fund revenue by department, which notes any exceptional department performance. Exhibit 1 below shows the City's Top 10 General Fund revenue sources in FY 08 as a percentage of total year-to-date General Fund revenue.
Exhibit 1 - Top 10 FY 08 General Fund Revenue Sources as a Percentage of the $310.9 million Total Yearto-Date
See Staff report in Legistar InSite for charts
FY 08 General Fund Expenditures
The Adopted General Fund Budget for FY 08 was $391.9 million. As of June 30, 2008, the total adjusted General Fund budget was $388.9 million, due to second quarter budget adjustments that included a technical adjustment to remove one-time capital improvement expenditures from the General Fund that were appropriated directly in the Capital Improvement Fund. Year-todate General Fund spending is $286.7 million overall, or 73.7 percent of budget, with 75 percent of the fiscal year complete. This positive trend is the result of several cost savings measures implemented by the City Manager early in the fiscal year, including department-specific vacancy savings targets, a management hiring freeze, limits on annual merit increases for management, a freeze on out-of-state travel and a freeze on purchasing sponsorship tables at community events. Expenditures related to recent labor agreements have not yet been reflected in the adjusted budget. Once these expenditures are included, the General Fund will be balanced with no surplus expected.
FY 08 General Fund Expenditures bv Department
There are several expenditure performance exceptions at the department level:
. The FY 08 Adopted Budget reflects a $650,000 reduction in the Civil Service Department's budget. The recent elimination of 7.6 positions from the Department's budget will help ensure the Department does not exceed its current year's budget. However, current estimates-to-close indicate this goal may be tough to meet. Financial Management staff will continue to work with Civil Service staff to align estimates-to-close with the Department's Adjusted budget.
. The Police Department's efforts to contain overtime expenses have been successful, with estimates-to-close indicating that the Department will end the year approximately $1.9 million under budget. To ensure the General Fund ends the year in balance, this savings will be used to fund over half of the Fire Department's required budget adjustment mentioned above.
Exhibit 2 - Largest FY 08 General Fund Expenditures Year-to-Date by Department, as a Percentage of the $286.7 million Total Expenditures.
See Staff report in Legistar InSite for charts
As expected, the majority of General Fund expenditures are composed of public safety services.
Of the $286.7 million expended to date, the Police Department (46.7 percent) and Fire Department (19.2 percent) comprise 65.8 percent of the total General Fund year-to-date expenditures. Exhibit 2 above shows the largest departments as a percentage of General Fund year-to-date expenditures.
Attachment D provides a listing of all departments' year-to-date General Fund expenditure performance. Attachment E displays General Fund spending at the department level as compared to the departments' current adjusted budget, including an FY 08 to FY 07 comparison. FY 08 General Fund expenditures total 73.7 percent of the $388.9 million budget, compared to 76.1 percent of the $384.0 million budget for the same time period in FY 07.
FY 08 Expenditure Performance - All Funds
The total Adjusted City Budget as of June 30, 2008 was $3.2 billion for all funds. Please see Attachment F for a breakdown of Citywide expenditures by fund. While it is not expected that department or fund expenditures would occur equally throughout the fiscal year or be fully expended in the current fiscal year due to the inclusion of multi-year projects, monitoring the rate of expenditure is a helpful indicator of resource management. With 75 percent of the year complete, year-to-date expenditure performance in all funds is at approximately 54.9 percent of budget.
Health Fund
Health Fund revenues and expenses are being received and incurred consistent with past performance. The Health Fund continues to struggle with cash availability due mainly to delayed grant reimbursements and has experienced an unprecedented cash shortfall for over 100 days without anticipated relief in the short-term due to the delay in the State budget adoption. Collections of grant reimbursable expenses from the State, a major source of revenues in the Health Fund, are being delayed upwards of 90 days, consistent with information received from the State, as they address a growing budget deficit in the current fiscal year.
Information from the State indicates that these delays may be the norm through FY 2009. As such, the Health Fund may end the year with a negative cash balance; thus requiring a temporary cash advance from the General Fund to end the year with a positive cash balance. In addition, as previously reported, State General Fund reductions of 10 percent across the board will significantly impact some grant-funded programs in FY 09; however, because of the State's overlapping fiscal year with the City's last quarter of FY 08, the City will see approximately $100,000 in revenue losses to the Health Fund in current year program budgets. These reductions will be offset with corresponding expenditure reductions to eliminate Health Fund impacts.
Going forward significant changes in service will need to be developed for the Health Fund to resolve its ongoing cash flow challenges and reduce the growing balance owed to the General Fund.
Development Services Fund
As a result of extremely low revenue trends due to the downturn in the housing market and loss of credit opportunities for property improvements, the Development Services Fund has been at risk of ending FY 08 with a negative fund balance. The Department has recently analyzed and updated current year revenue projections. On the expense side, it is projected that the Fund will end the year $1.5 million under budget. With these changes, the Fund is now expected to end the year in balance, but tenuously so. The Budget Office will continue to work with the Development Services Department to implement strategies to further stabilize the Fund in FY 08 and into FY 09, including a reduction in overall expenditures.
Towing Fund
Revenues are currently projected to fall short of budgeted amounts by approximately $455,000, or 4.9 percent. A recent efficiency change has been implemented to conduct public lien sale auctions on Saturdays instead of Tuesdays. While there are increases in Lien Sales and Vehicle Storage revenues for FY 08, they have been offset by lower towing revenues. The demand for tows from the Police Department, despite the use of Automated License Plate Recognition technology, has been significantly lower resulting in lower revenue. Despite the changing demand for tows, FY 08 Towing revenues are expected to exceed FY 07 performance by approximately $627,000, mostly due to increased towing fees adopted in FY 08. If the revenue trend continues without a similar decrease in towing expenses, a structural deficit in the Towing Fund will challenge the operation's ability to remain fiscally solvent, putting at risk the contribution it makes annually to the General Fund of $2.8 million on average.
Fleet Fund
The Fleet Fund is currently experiencing major expenditures to maintain underground fuel storage tanks in compliance with State rules and regulations and the increased cost of fuels and parts coupled with negotiated labor increases which have increasingly drawn down the fund balance forcing Fleet staff to use its capital funds for operation costs. In an effort to bring operating revenues in line with ongoing expenses, Fleet management will need to work with Financial Management to recover more of their expenses through the Fleet MOU with client departments. While this revision of Fleet rates will stabilize the Fund's balance and protect the Fund's capital monies for future purposes, the cost impact to client departments may be significant, warranting a full Prop L review of Fleet Services once the new rates have been calculated.
Other Significant Issues
Proposition H: Police and Fire Department Updates
On May 1,2007, the voters approved a special tax of 25 cents on every barrel of oil produced to be used specifically for police officers and firefighters. The Police and Fire Public Safety Oil Production Tax (known as Proposition H) is expected to yield approximately $3.7 million during FY 08. Year-to-date revenue received is $2.7 million, which is divided equally between the Police and Fire Departments. The Police Department has staffed and fully equipped 14 new Motor Officers. The Fire Department's FY 08 budget includes funding for 12 new Firefighters and a new fire truck. The new truck, to be purchased with funds collected during FY 07, will enable the current fire truck being utilized to return to spare status.
Public Safety Impact Fee
Public Safety Impact Fees include the Police Facilities Impact Fee (Chapter 18.22 of the Municipal Code) and the Fire Facilities Impact Fee (Chapter 18.23 of the Municipal Code). These fees were approved by City Council on April 1 0, 2007 and implemented on June 4, 2007. Revenue was not realized until FY 08, however, because the fee is collected at the end of a given project. Those permits that were assessed the fees in FY 07 did not get finalized until FY 08, and therefore the fees were not collected until FY 08. As of June 30, 2008, $113,093 has been collected, with an FY 08 estimate-to-close of $238,000. Of this amount, 38 percent were Fire Facilities Impact Fees and 62 percent were Police Facilities Impact Fees. The fee revenue is collected by the Development Services Department and deposited into the Police Facilities Impact Fees Fund and the Fire Facilities Impact Fee Fund to keep these monies segregated. There have been no requested expenditures to date against these collected fees. In general, exemptions to the fee include additions that do not result in additional dwelling units, replacement of a structure as a result of a natural disaster, low-income affordable housing, non-residential development less than 3,000 square-feet, replacement of a single-family dwelling on an existing lot of record and hospitals.
Conclusion
As a result of the City Manager implementing cost-saving measures early in the fiscal year and the Police Department projecting it will come in under budget, projections indicate the City will end the year in balance. The declining General Fund revenues will strain the City's ability to end the fiscal year with any appreciable General Fund balance. With less than two months remaining in the fiscal year, complete dedication to maintaining a balanced budget is essential to provide stable footing for Fiscal Year 2009 beginning on October 1,2008.
TIMING CONSIDERATIONS
City Council action on this matter is not time critical.
FISCAL IMPACT
There is no fiscal impact associated with the recommended action.
SUGGESTED ACTION
Approve recommendation.
Respectfully Submitted,
LORI ANN FARRELL
DIRECTOR OF FINANCIAL MANAGEMENT/CFO
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PATRICK H. WEST |
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CITY MANAGER |